Notes to the condensed consolidated financial report

1 Corporate information

Kumba is a limited liability company incorporated and domiciled in South Africa. The main business of Kumba, its subsidiaries, joint ventures and associates is the exploration, extraction, beneficiation and marketing, sale and shipping of iron ore. The group has its primary listing on the JSE Limited.

The condensed consolidated interim financial report of Kumba and its subsidiaries for the six months ended 30 June 2009 was authorised for issue in accordance with a resolution of the directors on 22 July 2009.

2 Basis of preparation and accounting policies

The condensed consolidated interim financial report for the six months ended 30 June 2009 has been prepared in compliance with the South African Companies Act No 61 of 1973, as amended, the Listings Requirements of the JSE Limited and International Accounting Standard 34, Interim Financial Reporting. The condensed consolidated interim financial report should be read in conjunction with the annual financial statements for the year ended 31 December 2008, which have been prepared in accordance with International Financial Reporting Standards (‘IFRS’).

The condensed consolidated interim financial report has been prepared in accordance with the historical cost convention except for certain financial instruments, share-based payments and biological assets which are stated at fair value, and is presented in Rand, which is Kumba’s functional and presentation currency.

Except as disclosed below, the accounting policies and methods of computation applied in the preparation of the condensed consolidated interim financial report are consistent with those applied for the year ended 31 December 2008.

The group adopted the following amendment to an existing standard and new standard with effect from 1 January 2009.

IAS 1 (revised), Presentation of Financial Statements
The revised standard requires that changes in equity resulting from transactions with owners (holders of instruments classified as equity) be presented separately from non-owner changes in equity (also known as other comprehensive income). In addition specific disclosures for components of other comprehensive income have been introduced. The adoption had no effect on the financial position or performance of the group.

IFRS 8, Operating segments
IFRS 8 replaces IAS 14, ‘Segment reporting’, and requires a ‘management approach’ under which segment information is presented on the same basis as that used for internal reporting purposes. This has resulted in an increase in the number of reportable segments presented, as the previously reported business segment, mining (being mining, extraction and production of iron ore) has been split further into the different mines that the group operates as well as its shipping operations.

Operating segments are reported in a manner consistent with the internal reporting provided to the chief operating decision-maker. The chief operating decision-maker, who is responsible for allocating resources and assessing performance of the operating segments, has been identified as the Kumba executive committee.

The accounting standards, amendments to issued accounting standards and interpretations, which are relevant to the group, but not yet effective at 30 June 2009, have not been adopted. The group is currently evaluating the impact of these pronouncements.

3 Property, plant and equipment

The group incurred capital expenditure on property, plant and equipment of R1.2 billion for the six months ended 30 June 2009 (2008: R589 million) for the expansion of its operations, mainly on the Sishen South Project, and R348 million (2008: R217 million) to maintain its operations, mainly for the acquisition of mining equipment.

A total of R205 million was transferred from assets under construction to machinery, plant and equipment for the period. Of this, R88 million related to the jig plant at Sishen Mine.

4 Share capital

The group acquired 301 603 of its own shares through purchases on the JSE Limited during the period. The total amount paid to acquire the shares was R53 million. The shares have been utilised in the allocation of conditional share awards under the Kumba Bonus Share Plan. The shares are held as treasury shares and the purchase consideration has been deducted from equity.

Options exercised under the management share option scheme during the period to 30 June 2009 resulted in 1 333 740 shares being issued (2008: 759,610 shares) with exercise proceeds of R64 million (2008: R25 million).

5 Interest-bearing borrowings

Kumba’s net debt position at balance sheet dates is as follows:

Movements in interest-bearing borrowings are analysed as follows:

Subsequent to 30 June 2009 Kumba has secured R3.2 billion to refinance the revolving facility that matures in November 2009. To date R2.7 billion of the R5.4 billion term debt facility raised in 2008 has been drawn down to finance Kumba’s expansion. This facility matures on 28 November 2013. The maximum net debt in terms of current covenants is R5.5 billion, Kumba will be released from this covenant upon repayment of the maturing revolving facility. Kumba was not in breach of any of its covenants during the period. The group has undrawn borrowing facilities at 30 June 2009 of R6.7 billion.

6 Significant items included in operating profit

Operating expenses
Operating expenses is made up as follows:  

Operating profit has been derived after taking into account the following items:

7 Income taxes

The income tax expense is recognised based on management’s best estimate of the effective annual income tax rate expected for the full financial year. The estimated effective annual tax rate (excluding Secondary Taxation on Companies) used for the year to 31 December 2009 is 27.5% (2008: 28.4%).

8 Related party transactions

During the six months Kumba, in the ordinary course of business, entered into various sale and purchase transactions with associates and joint ventures. These transactions were subject to terms that are no less favourable than those offered by third parties.

Included in cash and cash equivalents at 30 June 2009 is a short-term deposit facility placed with Anglo American SA Finance Limited of R450 million.

9 Segmental reporting

The chief operating decision-maker which is responsible for allocating resources and assessing performance of the operating segments, has been defined as the Kumba executive committee. Management has determined the operating segments of the group based on the reports reviewed by the executive committee.

The executive committee considers the business principally according to the nature of the products and service provided, with the segment representing a strategic business unit. The reportable operating segments derive their revenue primarily from mining, extraction, production and selling of iron ore and shipping operations charged to external clients.

Corporate, administration and other expenditure not allocated to the different segments therefore form part of the reconciliation to profit before tax and discontinued operations under the heading ‘Other segments‘.

The Kumba executive committee assesses the performance of the operating segments based on a measure of earnings before interest and tax (‘EBIT‘). This measurement basis is consistent with ‘operating profit‘ in the financial statements. Interest income and expenditure are not allocated to segments, as this type of activity is managed on a central group basis.

The total segment revenue comprises revenue from external customers as the group does not have any intersegment revenue.

A reconciliation of EBIT to total profit before income taxation is provided as follows:

Kumba is domiciled in South Africa. The result of its revenue from external customers and its non-current assets (other than financial instruments and deferred tax assets) disclosed on a geographical basis, are set out below:

Revenue from external customers:

Non-current assets:

10 Changes in contingent liabilities since 31 December 2008

There have been no significant changes in the contingent liabilities disclosed at 31 December 2008 that arise from the guarantees provided for environmental rehabilitation and decommissioning obligations of the Kumba Rehabilitation Trust Fund. The bank guarantees for property acquisitions have been exercised subsequently to the 2008 year end.

11 Legal proceedings

Lithos Corporation (Pty) Limited (Lithos)
Kumba continues to defend the merits of the claim and is of the view and has been so advised, that the basis of the claim and the quantification thereof is fundamentally flawed. A trial date has been provisionally allocated, being 8 March 2010 to 2 April 2010. No liability has been recognised for this litigation.

Faleme
Kumba has initiated arbitration proceedings against La Societe Des Mines De Fer Du Senegal Oriental (Miferso) and the Republic of Senegal under the Rules of Arbitration of the International Chamber of Commerce. The arbitration process will commence during the third quarter of 2009. These proceedings are confidential in nature.

ArcelorMittal SA Limited
Kumba and ArcelorMittal have agreed to arbitration to resolve the differences in interpretation of the Sishen Supply Agreement. Arbitration proceedings were initiated by Kumba. Arbitrators have been appointed and hearings commenced in June 2009. These proceedings are confidential in nature.

12 Post balance sheet date events

The directors are not aware of any matter or circumstance arising since the end of the period and up to the date of this report, not otherwise dealt with in this report.

13 Corporate governance

The group subscribes to the Code of Good Corporate Practices and Conduct as contained in the King II Report on corporate governance and the board has satisfied itself that Kumba has complied throughout the period under review in all material aspects with the code.

14 Independent audit opinion

The group’s auditors, Deloitte & Touche, have issued their unmodified review opinion on the condensed consolidated interim financial report for the six months ended 30 June 2009. A copy of their unmodified review opinion is available for inspection at the company’s registered office.

On behalf of the board